Is an FHA Loan Better Than A Conventional Loan?
That was the question I was asked from a home buyer who was purchasing a home in north Fulton County for $320,000, and planned on putting 10% down payment on that home.
A simple question: FHA or conventional? Which is better? But the answer is not quite so simple at first glance. Let’s dig into it.
A lot of the answer will depend on the borrower’s credit score. If it is under 700, then the decision is made: FHA. And the reason is simple, that it is very difficult if not impossible right now to get PMI on a conventional loan with a credit score under 700. And PMI is necessary on loans over 80% Loan to Value. Decision made.
So let’s assume that the borrower has a 720 credit score, and in every other way, qualifies for either loan. On the one hand, FHA has the up front Mortgage Insurance premium (Up Front MIP), so even though the down payment is the same, 10%, for both loans, the FHA loan amount will be higher, because we are rolling 1.75% Up Front MIP into the loan. Here is what that would look like:
Notice the loan amount for the conventional mortgage is $288,000; and with the same down payment, the loan amount for the FHA loan is $293,040. Again, because of the Up Front MIP.
The FHA loan could still make the most sense, depending on what the monthly Mortgage Insurance cost is for FHA and Conventional, and, of course, what the interest rate is. In this example, I am assuming an interest rate of 5.00% for both conventional and FHA. In reality, sometimes conventional rates are slightly lower than FHA. But let’s look at the monthly payment comparison for both loans:
All things being equal, with excellent credit and 10% down payment, a home buyer is better off with a conventional loan. The buyer will save $34.25 per month with conventional financing, and that’s over $400 per year.
There we have it. Settled. However, don’t discount the power of FHA financing. If the same scenario played out with a 680 credit score, then FHA would win hands down. And, FHA does allow for a lesser down payment as well – currently 3.5% is required. And that could be an attractive option and a way to conserve cash in the bank.
If I can help you with your financing on your Atlanta home loan, just let me know.
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